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On June 23, 2022, the Central Bank of Ireland (the “central bank“) published in final form its revised regulation on investment firms, the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) Investment Firms Regulations 2022(there “Rules 2022“) containing changes to Customer Asset Requirements (the “SELF“) accompanied by a support project The guidance note on what will be the third edition of the Regulation on Investment Firms (the “2022 CAR guidance“).
The 2022 CARs guidance addresses the revisions to the CARs contained in Part 6 of the 2022 Regulations (the “CAR 2022“) in order to help investment firms and credit institutions to start preparing for full compliance with CAR 2022 at the end of the transitional period which started with the publication of the 2022 regulations and will end for investment firms on July 1, 2023, and for credit institution firms on January 1, 2024.
These revisions stem from the decision of the Central Bank December 2020 Consultation Paper (“CP133″) on the improvements made to the SELFas contained in Part 6 of the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Investment Companies) Regulations 2017 (the “Rules 2017“) (“CAR 2017“).
In July 2021, the Central Bank published its feedback statement on the proposed improvements (the “Feedback Statement“) which included:
- Extend the scope and application of the CAR to include credit institutions undertaking MiFID investment activities;
- Introduce new requirements regarding customer disclosure and consent;
- Introduce new CAR guidelines to clarify Central Bank expectations of how customer funds should be segregated;
- Introduce new requirements and place some existing RAC guidance on a statutory basis, with respect to reconciliations; and
- The introduction of new requirements and CAR guidelines on the content of the client’s asset management plan (the “CAMP“).
The changes to the CAR are broadly consistent with the changes highlighted by the Central Bank in CP133. A summary of the main changes is provided below.
The Central Bank has extended the definition of “investment firm” in the 2022 Regulations to include credit institutions authorized under section 9 of the Central Bank Act 1971, which means that institutions credit institutions, when carrying out MiFID investment activities, will be required to comply with the CAR.
The Central Bank CAR regime is based on seven fundamental principles: segregation; designation and registration; reconciliation; calculation; disclosure and client consent; risk management; and review of client assets. In CP133, the Central Bank proposed to strengthen some of these existing obligations. The CAR 2022 guidance provides additional details on what the Central Bank expects from investment firms, as summarized below.
In the Central Bank’s feedback statement, it said it would clarify its expectation that client funds should be deposited directly into a third-party client asset account. The CAR 2022 guidelines addressed this issue by introducing new rules on depositing different types of client assets with third parties. It also sets out specific guidelines on how the investment firm should deal with client assets in the form of cheques, currencies and financial instruments.
The Central Bank had proposed several measures to strengthen the reconciliation process in CP133. This issue has been addressed in both the RAC 2022 guidance and the 2022 regulation with the introduction of new “internal” reconciliation processes and placing the previous guidance on reconciliation processes on a statutory basis.
The Central Bank had previously signaled its intention to align the calculation of customer funds with the reconciliation process. This issue has been addressed by the introduction of a new daily calculation process which requires the investment firm to investigate discrepancies within one business day, identify the cause of the discrepancy within five business days and correct the discrepancy as soon as possible.
With respect to client funds calculations, the CAR 2022 guidelines outline the balances to be considered for the calculation. Similarly, the CAR Guidance 2022 describes the method for calculating the resources of clients’ financial instruments.
4. Disclosure and Client Consent
In the feedback statement, the Central Bank said it would strengthen customer disclosure and consent provisions, with particular emphasis on more complex business models. In order to create a more robust client disclosure and consent process, RAC 2022 will now set out the mandatory minimum information that investment firms must disclose to clients and potential clients in their terms and conditions to enable clients to make decisions enlightened. Credit institutions that will be subject to the 2022 Regulations for the first time from 1 January 2024 should review any prior written consent received from existing customers in relation to the 2022 Regulations.
The CAR 2022 guidelines note that the Central Bank will not prescribe a standard form for the prior written client consent required by the 2022 regulations.
A noticeable absence
The Central Bank indicated in the Feedback Statement that it would put in place guidelines on how investment firms should deal with an unreachable client in the context of a transfer of business1. She said she would set some minimum requirements to get in touch with the customer. However, at present, the RAC 2022 guidance does not appear to directly address this issue. This is disappointing, as practical advice on how to deal with unreachable customers would be welcomed by the industry, particularly in light of the many changes in the Irish financial services sectors.
5. Risk management
The CAR 2022 guideline introduces two matrices that can be used to objectively assess compliance with the established risk management framework, the Client Asset Applicability Matrix (“CAAM“) and the client’s asset risk matrix (“CARMThe RAC Guidance 2022 also defines the structure and a non-exhaustive list of elements that may be included in the content of the PAC in addition to the information required under the RAC 2022.
Client Asset Monitoring Manager
Now that the scope of the CAR has expanded to include credit institutions engaged in MiFID investment activities, these credit institutions will also be required to appoint the pre-approval controlled function (“CPF“) of the person responsible for monitoring client assets (“HCAO“). In the feedback statement, the Central Bank clarified that this requirement will also apply to persons who are already designated as “sole agent”.2 or who hold existing PCFs in credit institutions.
The transition period started with the publication of the 2022 Regulation and will end for investment firms on 1 July 2023 and for credit institutions on 1 January 2024. The RAC 2017 will remain in force until it is repealed by the Regulation 2022 on July 1, 2023 and companies are required to comply with the 2017 CARs for the duration of the transitional period.
The 2022 CARs guidelines will remain in draft form until the 2022 CARs come into effect. Final guidance will be uploaded to the Central Bank’s website before the end of the transition period.
In order to comply with CAR 2022 at the end of the transitional period (July 1, 2023 for investment firms and January 1, 2024 for credit institutions), firms must carry out a gap analysis, identify the actions necessary to put in place the necessary internal systems, procedures, policies and expertise to comply with the requirements. As some of the requirements may require reprinting existing customer documentation and obtaining customer consent, this should be built into the timeline to ensure compliance once the transition period is over.
1 Question 21, Feedback Statement
2 According to paragraph 6, paragraph 1, of annex 3 of the MiFID regulations
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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